Business Economics Assignment

Business economics assignment

Part A

1. Many firms have similar cost structures, it might be possible to predict the prices of other competing organizations. Also cost plus pricing is simple to compute.

Markup= (price-cost)/ cost price= cost (1+markup)

P= Lab+ Mat+ Mkt+ F/Q+Z*A/Q

Q: planned output A: gross operating assets Z: desired profit rate

MR=P/ (1+1/Z) if firm is maximizing profit: MC=MR=P/ (1+1/Z)

P= MC* [1/ (1+ 1/Z)]

So profit maximizing price is a mark up on marginal cost depending on demand elasticity. If AC closes to MC, then close to max.

2. The potential problem of cost plus pricing is that the supplying division may have the opportunity to pass on operating inefficiencies to the purchasing division in the form of higher prices where no predetermined cost is agreed between divisions, this problem can arise in the short-term as well as the longer term. As the amount of profit for the supplying division is determined